FINANCE—PUBLIC AND PRIVATE.
FIRM MARKETS.
CONFERENCE UNCERTAINTIES—WILL ACTIVE TRADE MAKE STOCKS DECLINE i—HOME RAILWAY YIELDS—SPECULATIVE MARKETS BETTER.
[To THE EDITOR 07 THE " SPECTATOR."] SIR,—Confidence in the City with regard to the outcome of the Conference between the British and French Prime Ministers concerning Reparations has not been strengthened by the Balfour Note. The City, indeed, is more bewildered than ever to comprehend the motives of the Government in issuing such an ill-timed and unfortunately worded document. That sooner or later the course of events may compel America to take something more than an academie interest in the economic state of Europe is not at all improb- able, but that possibility makes it the more important that the American Government should be given no chance of misunderstanding our own attitude towards the sanctity of contracts. Meanwhile, although it professes to recognize the serious political and social issues which are involved in the present economic crisis in Europe, the Stock Exchange pursues the even tenor of its way, being apparently content to base expectations of continued improvement in investment securities upon the simple fact that these uncertainties, not to say anxieties, are pre- venting a revival of trade activity, and therefore con- tribute to a continuance of cheap money which has been the main factor responsible for the improvement in high- class investment stocks.
* * * * A propos of suggestions which I have made from time to time as to the possibility of any revival in trade occasioning dearer money and a setback in securities, a correspondent (" Lancastrian ") writes me as follows :- " I have (he says) observed occasional suggestions in your interesting notes that market prices of gilt-edged stocks will decline as soon as trade improves, the inference being that more capital and new capital will be attracted by industrial developments. May I put one or two points forward for your consideration ? We may assume that the principle of supply and demand will operate upon prices. Is there any reasonable probability that within the next few years trade and com- mercial credits will so improve as to enable commercial or trading concerns to use profitably capital additional to that already employed in their business ? Having regard to the fact that industrial capital has been greatly increased during the last six or eight years, and to the fall of prices of commodities, will not firms be able to finance their business with their present capital ? Until commercial and international credit is tho- roughly restored—and that seems likely to take some years— will not the method of short credits and quick turnover be likely to prevail, the effect of which will be to make less amounts of capital than hitherto necessary for trading purposes ? Assuming that many commercial firms, not being able to utilize their capital profitably in trade recently, have invested in gilt-edged, and assuming that trade improved, will that im- provement necessarily involve their realization of their gilt- edged stocks ? So long as the Bank Rate is lower than the interest earned on their gilt-edged investments, and so long as the banks have huge sums on deposit account, will it not pay firms best to hold on to their steady interest-paying securities, using them if necessary to secure bank overdrafts which they can now obtain at probably 1 per cent. less than the interest earned on their investments ? Firms only pay overdraft interest according to the state of their account day by day, and they will presumably not keep a lump sum of money on deposit account at say to per cent. interest when their investments pay say 5 per cent. Will they need to sell their investments ? Why should they ?
I am inclined to think that the Stock Market exaggerates the probable effect of improved trade demands on gilt-edged values, and seeing that gilt-edged prices have not responded much to the last two reductions in the Bank Rate I think gilt-edged prices should rise as soon as general confidence is restored. What is your view ? "
* * * " Lancastrian's " view is interesting and deserves consideration. Briefly stated, his main contention is, that having regard to the expansion in capital during the post-War period and the great fall in commodities which has since occurred, a revival in trade would have to be very pronounced to produce conditions driving the merchant, manufacturer, or the public company to the banks for accommodation to finance increased activities. Moreover, my correspondent might also have added a further consideration to which I have sometimes referred- iamely, that inasmuch as some firms and companies at all events are still " locked up " in " frozen " assets on which they have obtained loans from their bankers, it is probable that a revival in trade activity might actually occasion increased financial liquidity through the realization of such assets. Nevertheless, I think that most City men and most bankers would incline to the opinion that " Lancastrian's " views would find their application for the most part limited to the early stages of any trade revival. That is to say, those who believe that easy money with a consequent strength of gilt-edged securities is likely to be of long continuance might urge in support of that view, first, the unlikelihood of any early revival in trade owing to the restraint imposed on international commercial relations by the chaotic condition of Europe, and second, that, for the reasons suggested by " Lan- castrian," the effect upon monetary conditions during the early days of a trade revival might be comparatively small. I do not think, however, that a trade revival would go very far before monetary and Stock Exchange conditions might change more considerably than may appear possible at the present time. In this connexion it must not be forgotten that just as the present strength of markets has been helped by speculative purchases on the part of those who anticipate easy monetary conditions, so the mere anticipation of change in those conditions would occasion extensive realizations. * * Even at the present moment, while gilt-edged securities remain steady to firm, the tendency to which I referred some weeks ago of activity tending to shift to English railways, Home industrials, and even to some of the speculative markets, is clearly apparent. As regards the first-mentioned group, interest has been quickened, both by the various merger schemes and by the recent dividend announcements. With comparatively few excep- tions the amalgamation schemes have given satisfaction to the various interests concerned, though it remains to be seen whether as a result of these fusions the economies will be as great as has been predicted in some quarters. Meanwhile, and partly in consequence, it must be remembered, of the abnormally high fares, the railways seem to be prospering, and in nearly all cases recent dividend announcements have been on a higher scale than a year ago. Indeed, if I were to take the latest dividend announce- ments and combine them with those of the preceding half-year the yield shown to the investor, even at present prices, would be very striking. As a matter of fact, how- ever, it would be rather unwise to employ this basis of comparison because, during the first half of 1921, a very cautious attitude was adopted and dividends were declared at a low rate. Then, for the second half of the year, the matter was adjusted by the declaration of substantial dividends.
For the first half of the current year the attitude of extreme caution is less pronounced and, as I have already said, there is a general advance compared with a year ago. It does not, however, necessarily follow that for the second hall of the year dividends may be as good as for the second half of 1921 (they may, of course, be even better), and, therefore, the investor would do well to adopt the more cautious policy of calculating yields on the actual dividend distributions for the whole of last year. Even so, it will be found that in the case of Brighton A, for example, a yield is given of nearly 7} per cent., while in the case of South-Eastern Deferred, London and North-Western Ordinary, Midland Deferred and Great Western, the yield is well over 7 per cent. It must not, however, be forgotten that the companies are still benefiting by the prospective receipt of the final balance of the com- pensation money to be given by the Government as well as by the inordinate charges both for passengers and goods. For the moment, therefore, while the yields to the investor are attractive and, conceivably, may be on an enduring basis, the prospective investor should regard the industry as being somewhat in a state of flux, while he will also not forget the extent to which in times past the market has proved to be at the mercy of the Labour agitator.
* * * Concerning the Industrial and Speculative markets, perhaps all that can be usefully said at the moment is that there is the usual tendency for activity to flow over from the investment sections into the more speculative descriptions. In the case of South African Mines, however, there has undoubtedly been a tendency for some time past in the direction of improvement. Prices were held down for a good while by the high costs of labour on the Rand —a circumstance which has never been really offset by the premium on gold arising out of the position of the American exchange. Rightly or wrongly, the premium has been looked upon as temporary, but now that working costs on the Rand have been reduced, some of the better-class South African mines have come in for greater attention. In the Foreign Market a feature of the last few days has been the revival of interest in Mexican descriptions. Whether the move- ment is justified must depend largely upon whether the Mexican Government is about to receive recognition by the United States. In rather well-informed quarters in the City the view prevails that such recognition cannot be long deferred.—I am, Sir, yours faithfully,
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